How to set land and property tax rates?

Setting a tax rate is a difficult policy decision since it involves weighing the need to raise municipal revenues against the ability of taxpayers to pay. Given the tax base, and how much a government aims to raise from land or property tax, a tax rate can be determined – as long as it satisfies affordability constraints for taxed individuals.

A house is typically seen as affordable if it is 2-3 times the owner’s annual income

The affordability of land and/or property taxes depends on a range of factors, including taxpayer incomes and other taxes they pay – including other taxes on land and/or property, such as capital gains tax. Given that a house is typically seen as affordable if it is 2-3 times the owner’s annual income 26, property values can give a rough idea of owner incomes, which can be used to estimate what percentage of incomes would go towards any particular tax rate.

Tax rates across the world

Land and property taxes across Europe and in the US are typically set somewhere between 0.5-1% of market value per annum.27 In East Asian countries such as China and the Philippines, property tax rates are approximately 1-2% whilst annual property taxation in South Korea is levied between 0.15 and 0.5% of property values.2829

In many sub-Saharan African countries, high tax rates are applied to outdated asset values – in Kenya, for example, land taxes range from less than 10% to over 30%.27 In others, however, rates can be much lower; in Rwanda, taxes on land and buildings under freehold titles are set at only 0.1% of asset values.31

In many developing cities, different rates are often applied to land and property based on whether they are used for residential, commercial, or industrial purposes. At the same time, tax rates are sometimes differentiated by area if there are certain public services that only benefit particular areas in a city 32. Variable tax rates can be beneficial in a number of cases. Higher tax rates on vacant or underdeveloped land alone, for example, can be key to reducing land speculation, where land is bought by investors as a short-term investment with no intentions to develop it. In Gaborone City in Botswana, for example, land tax rates on underdeveloped plots are four times higher than on developed plots, in order to discourage speculation and encourage rapid development33. Policymakers may also want to capture a greater proportion of the value of residential properties that generally make greater use of public services and infrastructure than non-residential properties.

In Gaborone City, Botswana, land tax rates on underdeveloped plots are four times higher than on developed plots, in order to discourage speculation and encourage rapid development

However, introducing variable tax rates can, like exemptions, increase complexity of the tax system, and raise associated administrative costs in its implementation. Differentiating between types of land/property or their values substantially increases the data requirements, increases the opportunity for error in judgement, and face similar administrative challenges as implementing exemptions. In addition, the more complex the system of tax rates, the more difficult it is to communicate the system transparently to taxpayers. If administrative capacity is low, a single rate may be the best option for policymakers.

Footnotes

  • 26 Sally Murray, Mihaly Kopanyi, and Patrick McSharry, ‘A Land Value Tax for Kigali: Analysis and Policy Considerations’ (IGC, 2016).
  • 27 Kopanyi and Murray, “An Effective Property Tax Regime for Rwanda (Draft Report).”
  • 28 Global Property Guide, “China Capital Gains Tax Rates, and Property Income Tax,” Text, Global Property Guide, (2013); Global Property Guide, “Philippines Capital Gains Tax Rates, and Property Income Tax,” Text, Global Property Guide, (2016)
  • 29 Global Property Guide, “South Korea Capital Gains Tax Rates, and Property Income Tax,” Text, Global Property Guide, (2016)
  • 30 Kopanyi and Murray, “An Effective Property Tax Regime for Rwanda (Draft Report).”
  • 31 Ibid.
  • 32 Richard M. Bird and Enid Slack, ‘Land and Property Taxation: A Review.’, in Paper Presented at the World Bank Land Workshop, April 3–6, Budapest, Hungary., vol. 19 (Citeseer, 2002).
  • 33 Alosyus Mosha, Challenges of Municipal Finance in Africa: With Special Reference to Gaborone City, Botswana, Human Settlements Finance Systems Series (Nairobi: UN-HABITAT, 2010).